Taxation of Digital Economy

Abstract

The digital sector has little physical presence in taxing jurisdictions, rendering its taxation challenging. The OECD’s October 2015 BEPS Action 1 Final Report observed that digitalisation exacerbated BEPS and identified ‘nexus, data and characterisation’ issues. The G20 asked that OECD’s Inclusive Framework (IF) of more than 100 members deliver a solution by 2020. A 2018 interim report analysed nexus and profit allocation rules but repeated the challenges of ring-fencing it for taxation. Nevertheless, the IF released a Policy Note in January 2019 grouping proposals into two pillars—one on nexus and profit allocation (Pillar One) and one on ensuring a minimum level of taxation (Pillar Two). Pillar One could not generate consensus though a ‘Unified Approach’ (UA) document was released in October 2019. Consultation occurred on Pillar Two in December 2019. In January 2020, a note, ‘Outline of the Architecture of a Unified Approach on Pillar One’ was released. The United Nations proposed a framework for digital economy taxation in August 2020 with little traction. In October 2020, the OECD admitted that Pillar One discussions were deferred. This chapter relates the nature of the digital economy, revealing why multilateral taxation has been impossible, with countries taking unilateral steps to tax it.